This Week in European Politics

Editors’ note: MarketMinder is politically agnostic. We favor no party nor any politician and assess political developments solely for their potential market impact.

Political change of any kind can stir big emotions. Hope for change! Or fear of the same. In markets, the latter is a powerful factor possibly driving up uncertainty. Hence why we think gridlock is golden for stocks. If governments can’t pass much legislation, they can’t create winners and losers via new regulations, taxes or industrial policies. That clears the horizon for companies to plan and invest without having to worry big changes down the road will zap those investments’ profits. Happily for markets, gridlock is 2021’s biggest political theme, and political developments this week in Europe—Germany’s regional elections and the Dutch general election—gave it another boost.

Dutch voters elect gridlock. Again. After Wednesday’s vote, the Netherlands looks set for another inactive, multiparty coalition government—one unable to enact material legislation. Prime Minister Mark Rutte’s center-right People’s Party for Freedom and Democracy (VVD) won the most seats, 35 of Parliament’s 150, boosting their existing plurality by 2. This likely returns Rutte, who has served since 2010, as premier. In second, the center-left, pro-European Democrats 66 (D66) party gained 4 seats for a total of 23. Coming in third, Geert Wilders’ far-right Freedom Party lost 3 seats, taking 17.

With the VVD winning, Rutte gets first crack at forming a government. He said renewing the prior coalition with D66 “would seem obvious,” but they would probably still need two more parties to form a government.^[i] It could therefore take a while to hammer out a ruling arrangement—the prior four-party government took the better part of a year to cobble together, and it fell apart in January over a child benefits scandal. But however it goes, a multi-party coalition with deep ideological differences likely emerges, extending the Dutch gridlock markets have enjoyed for years. (Hat tip: Fisher Investments Research Analyst Charles Dornbush)

Germany’s local elections don’t imply major change. On Sunday, outgoing German Chancellor Angela Merkel’s Christian Democratic Union (CDU) suffered historic losses in two states, Baden-Württemberg and Rhineland-Palatinate, losing to the Greens and the Social Democratic Party (SPD), respectively. The CDU took only a quarter of the vote in each state, versus about a third for the winners. This has many extrapolating these results to September’s federal election, but we don’t think it changes all that much considering no party was likely to emerge with a big majority anyway.

The CDU’s big losses likely reflect voter frustration over a corruption scandal embroiling the CDU and the rocky vaccination rollout, but they don’t represent a sea change. The Greens’ and the SPD’s respective state premier candidates were both popular incumbents expected to win. Moreover, regional governments’ composition varies greatly and isn’t very telling about federal politics.

One thing these results might influence is the CDU’s pick to run for Chancellor in September. Merkel’s preferred successor, Annegret Kramp-Karrenbauer, stepped down as party leader last year and removed herself from contention. Armin Laschet became party leader in January, but he lacks Merkel’s pizzazz, and most viewed these contests as a litmus test for him. The CDU’s poor showing may tilt the momentum toward someone like Markus Soeder, the popular leader of the CDU’s Bavarian sister party, to be the standard bearer. But only time will tell. Regardless, with no party looking set to run away with the vote, and no future chancellor in the wings with anywhere near Merkel’s political capital, another coalition that can’t do much seems likely this fall, which markets have been just fine with.

So far in 2021, the political inaction we previewed last year appears to be coming into clearer focus—a tailwind for global markets. With elections this year likely to yield fractured, do-little governments, we think investors should enjoy the falling political uncertainty.